Business lecture 5
Firms
From the start it has always being that case that individuals trade goods to each other, in effect most people became sole traders meaning they are self-employed. In most cases this is still the form of trade today, they can trade a product that they have grown, produced or made or they can trade with their services, their expertise and knowledge.
A firm is easy to start, you just have to begin! This is very common in our field as designers; this is how freelance designers come about. However there is a warning if you are going to be a sole trader, its important to keep a clear record of your accounts and financial records, the tax man will want to see them!
As trade grew we quickly became aware that we needed more money to develop the trade further, this resulted in partnerships....
Partnerships
A partnership is when two or more people, normally no more than 7 but not to say it cant be more, get together with intent of supplying something with the aim of a financial return. Starting a partnership is easy, you just agree with the other person and away you go, however they are more difficult to stop, as they have to be fully dissolved. If the agreement is on paper, the contract will have terms of where the money comes from an where the money goes in case of a split from the partnership, if this was not agreed each arty will get equal amounts.
The benefits of having a partnership is that you don’t have to tell anyone what kind of money you’re making, just the taxman will see this information. It means that your competitors don’t know if you’re a success or not. However this can cause problems because it means that you and your partner are liable for each other’s debts, whether they are business related or personal, this requires trust within the partnership. This is why professional firms like accountants and lawyers used to be partnerships, however usually now the firms are owned by one person.
In traditional partnerships usually one partner would handle the money and the other has the trade ability, however modern partnerships are more complex, the have limits...
It became evident that even more money was needed as trade grew, and to attract this funding, the government developed the 'limited liability firm', this is an incorporated firm or company.
Limited liability firm
This type of firm means the investment is limited, all you have to do is invest in the company and you can become a silent partner. However to be able to do this, you have to be able to produce a number of thing to investors, accountants and banks...
1. Be able to publish and publication on what the firm is about
The companies were protected, meaning that you have to publish a statement about what the firm is about, in the form of articles or memoranda.
2. Publish ' annual returns' about the company’s performance
This document needs to include the following...
-Profit/loss accounts
-Balance sheet statement- statement of all assets
-List of directors and addresses and the directorships they hold
3. Lodge all this data with company’s house
You have to submit these accounts each year; anyone can look at these documents including your accountant as well as competitor’s accountants. It shows how much profit you have made and how much you turned over.
4. Have accounts independently audited
An accountant ha to they say if its a true record of your company or not after you have go all these things and are ready to submit them.
Issues
There can be issues with this, its important to not start a limited company blind because paper work ramps up and gets complicated. If you get a 'one off peg' from your solicitor it can be only 2 weeks before your company is up and running, with a small start up cost of £200. However they are not always the best option and stopping a ltd company is difficult. This is because f you set up a ltd company by law the company is seen as a person, your responsibility is to the company above yourself, if you are a director and you abuse this, you can be stripped of your title. Whatever is the firms is the firms and not yours personally even if you earn it, you must do what’s best for the firm and again not you even in the conflict of interest.
This then brought on the development of a public limited company, in a public ltd company the shares are freely traded where as with an ltd company, they are not, meaning anyone can join whether they are big or small.
Issues of debt
Its important to know that all firms have a degree of because in essence they use other peoples money, with the aim to use other peoples money to make more than the cost of borrowing and running the firm, don’t be scared of debt just be aware of the cost of borrowing in effect the interest rate you would need to tae inter consideration the terms of your situation for example if the project is long and their is no income streaming in, you need to know how much you will need to make that work and pay yourself a salary. You may always be managing debt, so get used to it.
To manage debt effectively you must understand your costs...
- You must control your money flow
- You must know what is being spent on what
- You must have a good idea of what’s going to be spent on what
